- The Russian economy shrank 1.9% y/y in Q1 15, much less than expected.
- Fixed investments, private consumption and real wage growth are taking the major hit.
- We see the Russian economy expanding after 2016. Assessment and outlook
Russia’s GDP shrank 1.9% y/y in Q1 15, according to the country’s statistical service Rosstat, far better than consensus and our estimates (both -2.6% y/y). Russia’s ministry for economic development expected a 2.2% y/y fall. The details have not yet been published, but we believe that the major hit was caused by two factors: crashing oil prices (Brent average fell 48.8% y/y in Q1 15) which pushed exports down (-26% y/y in Q1 15 on average) and extremely hawkish monetary policy, which kept growth in fixed investments in negative territory and sent private consumption down sharply. On the other hand, accelerated inflation (16.9% y/y in March 2015 versus 6.9% y/y a year earlier) and the devalued rouble have further worsened Russian consumers’ purchasing power. In addition, compared to early 2014, due to geopolitical woes, the introduction of western sanctions and Russia’s counter-measures, both the cost of foreign capital and consumer prices continue to stay on the high side. However, we can see that the freely floating rouble has protected the Russian economy better than expected from external shocks. Due to significant devaluation and sanctions, local production benefited the most, expanding 0.6% y/y in Q1 15 on average, versus 0.9% y/y a year earlier.
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